Why Economists Are Still Grasping
For Cure to Global Poverty
January 11, 2007; Page A7
With the billions of dollars they are spending, Bill Gates, Warren Buffett, Bill Clinton and Bono are likely to make progress in their quest to prevent treatable diseases from killing millions of people. Nearly all of these people live or will live in poor countries.
That worries economist Simon Johnson. He doesn't doubt the moral imperative to fight disease. Still, he wonders: "Do we really know how to help the poor people -- the increasing number of poor people? Do we really know how to help them out of poverty?"
Such questions haunt academics, governments, international institutions and global do-gooders. They are impressed with China's rapid modernization, though puzzled that it has done so well without following standard precepts. They are disappointed and puzzled that Latin America nations haven't done better, especially because so many did take the advice of the experts. They are depressed and puzzled by the continued widespread misery in Africa.
With intellectual humility, Mr. Johnson, a professor at Massachusetts Institute of Technology's Sloan School of Management, faced a roomful of peers at the annual meeting of the American Economics Association last weekend and said, "Public health had the germ theory of disease. Economics has made great progress, but it's still waiting for its 'germ theory of disease.'" That probably overstates the challenges remaining to public-health warriors -- avian flu, AIDS/HIV, malaria and all -- but not the shortcomings of economic understanding of what poor countries should do to achieve sustained growth.
The U.S. and Europe pulled ahead of the rest of the world in the 19th century, the result of the Industrial Revolution, the evolution of financial markets and the discovery of new drugs and chemicals. With a few remarkable exceptions -- South Korea, for one -- the gap between rich and poor nations persists. The notion that there was something special about "development economics" dates to post-World War II years when mostly poor, mostly rural colonies gained their independence. Says Anne Krueger, an economist who recently finished a stint as No. 2 at the International Monetary Fund: "It was natural that a major objective of...the 'modernizing elite' was to achieve economies and living standards similar to those in the 'developed,' as they were then called, economies." Poor countries had rice patties or coffee plantations; rich ones had factories. The trick, it was believed, was to hasten the industrialization of poor countries, and government had to lead the way.
The prescriptions didn't work out as well as optimistic postwar poverty fighters hoped. Poor countries have had growth spurts punctuated by crises. Rich countries have crises, too, but they bounce back much more quickly, while poor countries often stagnate for years after a crisis, observes Sebastian Edwards, an economist at the University of California at Los Angeles.
Why is that? Why aren't more poor countries catching up faster?
One view, articulated by Ms. Krueger, is that so-called Third World governments and their First World advisers applied sound economic principles incorrectly or without sufficient attention to the reality. Policies to encourage exports and shield embryonic industries from imports until they got rolling sounded good, for instance, but bred corruption, infantilized industries and created politically powerful vested interests that blocked needed change.
Another view is that poor countries got bad advice and paid the price, but that today's experts know much more than their predecessors. "We don't have recipes, or a checklist," Mr. Edwards says. But, he says, we do know the ingredients: educating workers, accumulating capital and investing it widely, improving productivity. Even he concedes economists are better at dissecting success stories -- China, for one -- and identifying particular reasons for each one's success than generalizing to advise struggling countries what steps to take to boost living standards for the masses.
A third view is that earlier economists focused on the wrong thing. Mr. Johnson, among others, argues that what really matters is having solid political, legal and economic institutions -- courts, central banks, honest bureaucrats, private-property rights -- that allow entrepreneurs to flourish. Imposing what seem to be sound economic policies on corrupt, incompetent or myopic governments is doomed. Building strong institutions is a necessary prerequisite. In this camp, there is a running side argument about which comes first: the institutions or the educated people who create them. Was the Constitution key to U.S. success, or was it Jefferson, Madison and Hamilton?
Technological advances and the spread of markets likely will boost the overall income of the world significantly over the next 25 to 50 years. "But," Mr. Johnson warns, "at least half the world's population will likely not participate fully" -- unless his crowd finds better ways to spread prosperity along with better health to poor countries.
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